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Irish Budget Watchdog Calls For Further Austerity

by Robert Lee,, London

17 October 2011

A series of significant developments means that the Irish government needs to strengthen its fiscal consolidation efforts beyond the parameters of plans made earlier in the year, the newly established budget watchdog has said.

Publishing its Fiscal Assessment Report, the Irish Fiscal Advisory Council has said that while the macroeconomic and budgetary projections set out in the Stability Programme Update (SPU) in April were broadly appropriate at the time, major developments have impacted on Ireland’s medium-term budgetary outlook.

Finance Minister Michael Noonan announced the creation of the Council in June, with a mandate to provide an assessment of the appropriateness of the fiscal stance set out by the government and its economic and budgetary projections. Noonan said at the time that: “The establishment of the Irish Fiscal Advisory Council is another important step in the process of reforming Ireland’s budgetary framework. The Council will provide an independent assessment of the government’s budgetary plans and projections and, in doing so, will help to inform the public discussion surrounding economic and fiscal matters."

The report notes that many of the main forecast agencies have recently revised down their projected growth rates for Ireland, in part reflecting increasing uncertainties about the global environment. This, the Council says, has clear downside risks. On the other hand, the report argues that the changes agreed by European leaders in July, regarding the revision of Ireland's bailout interest rates, should be seen as an upside. The agreements will generate interest savings of approximately EUR1bn (USD1.37bn) per year from 2012-2014. Another positive money saving development is that the funding requirement for the banking recapitalization programme is now likely to be approximately EUR3.5bn lower than envisaged in March.

However, the need to meet deficit reduction targets raises a number of issues for the government. The Council believes that the discretionary adjustments planned in the SPU for the period 2012–2015 should still be sufficient to bring the general government deficit below 3% of GDP by 2015. Nonetheless, an additional EUR400m in discretionary adjustments would be required to meet the 8.6% general government deficit target for 2012.

The Council suggests a modest reduction in the targeted deficit, to 8.4%. It is estimated that this would imply increasing the required measures from the SPU plan from EUR3.6bn to EUR4.4bn in 2012. Noonan is due to deliver his medium-term consolidation plans before the end of the month, and has already indicated that he intends to unveil changes to the tax system, along with substantial government spending cuts.

In addition, the report argues that the government faces an unenviable balancing act in deciding the appropriate fiscal stance for 2012–2015. It says that the domestic economy remains weak, while the debt and funding situation for Ireland will remain fragile for some time to come. It suggests changing the deficit target from 2.8% to 1% in the medium-term, and projects additional austerity measures to the tune of EUR4bn.

The Council ventures that a more rapid restoration of sound public finances, would not only be highly desirable in its own right, but would have a favourable impact on the country’s creditworthiness. It is believed that it would also provide a degree of insurance that the existing programme targets will be met. It is stressed that the longer term implications for the economic and financial health of the country should also not be underestimated.

TAGS: tax | economics | Ireland | fiscal policy | banking | gross domestic product (GDP) | international financial centres (IFC) | budget | International Monetary Fund (IMF) | offshore | European Union (EU) | Europe

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